A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5 percent. The cost of the firm's common stock equity is ________.
A) 5 percent
B) 8 percent
C) 10 percent
D) 13 percent

Question

Quizplus · Accepted Answer

The cost of common stock equity can be calculated using the Gordon Growth Model (Dividend Discount Model): Cost of Equity = (Dividend per share / Current market price) + Growth rate = ($2 / $25) + 0.05 = 0.08 + 0.05 = 0.13 or 13%.

A Firm Has Common Stock with a Market Price of $25